Matthew D. Pechous, Walking the Tight Rope and Not the Plank: a Proposed Standard for Second-level Appellate Review of Equitable Mootness Determinations

• Publication year: 2011

WALKING THE TIGHT ROPE AND NOT THE PLANK: A PROPOSED STANDARD FOR SECOND-LEVEL APPELLATE REVIEW OF EQUITABLE MOOTNESS DETERMINATIONS

INTRODUCTION

Imagine you operate a business forced into bankruptcy. You spend months struggling to keep your business afloat as you negotiate the bankruptcy process, all to craft a plan that could both satisfy enough of your creditors and convince a bankruptcy judge that it would return your business to an economically viable state. Over the objections of a few, standoffish parties—a few minor creditors, perhaps, or the former equity holders—the judge confirms the plan. Even as the dejected parties appeal, the judge allows you to begin the process of your economic rebirth. By the time your case is heard by the first-

level appellate court,1 you have achieved most of what the plan required. The

court, weighing equitable concerns and invoking the doctrine of equitable mootness, refuses to entertain the appeal because doing so would upset the reorganization plan. Still unsatisfied, the parties appeal even further to the court of appeals. Now an additional issue arises: how will that court review the lower court’s determination that the appeal of one or more claims is moot? Reviewing the determination without any deference whatsoever could result in the reversal of hundreds of complex and tricky financial transactions, potentially wrecking the debtor’s reorganization. Yet if the court grants too much deference, it all but denies the appellant her right to a meaningful appeal.

During the widespread economic chaos of the past few years, the United States has become intimately familiar with bankruptcy.2 Businesses have not been spared these pressures and, like the rest of the nation, have filed dutifully

1. Throughout this Comment, “first-level appellate court” refers to either a district court or bankruptcy appellate panel, and “second-level appellate court” refers to a circuit court of appeals.

2. There were over 1.4 million bankruptcy cases filed in 2009, representing an uptick of 11.1% from

   2000 and a 34.5% increase from 2008. JAMES C. DUFF, ADMIN. OFFICE OF THE U.S. COURTS, JUDICIAL BUSINESS OF THE UNITED STATES COURTS: 2009 ANNUAL REPORT OF THE DIRECTOR 1 (2010), available at

   http://www.uscourts.gov/uscourts/Statistics/JudicialBusiness/2009/JudicialBusinespdfversion.pdf. Ninety- three of the ninety-four districts reported increases in the number of filings. Id. at 3. These numbers also represent the highest number of filings since the benchmark year of 2005, when the masses rushed to file before the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) took effect. Id. at 19.

   into bankruptcy courts.3 Although most of these businesses liquidated,4 many sought shelter in chapter 11 to prevent their businesses from folding.5 The flexible structure of chapter 11 reorganizations allows the corporate debtor to reform its financial affairs to preserve the inherent value of the business for the benefit of all parties involved.6 However, there are many pressures that encourage the debtor to exit bankruptcy as soon as possible. For instance, many debtors require funding to survive. In the short run, the debtor needs this capital immediately to continue normal business operations while navigating the bankruptcy process.7 In the long run, the funding necessary to survive outside of bankruptcy may be contingent on plan confirmation.8 Chapter 11 of the Bankruptcy Code (Code) attempts to balance the interests of involved parties by favoring speedy and final resolution to aid the debtor to quickly reemerge as a viable entity.9 On occasion, however, a focus on quick resolutions in bankruptcy reorganizations can run counter to other important judicial concerns inherent in federal appellate proceedings.10

   
   

3. Chapter 11 filings increased from 8,785 in 2008 to 14,745 in 2009, a 68% jump. Id. at 22. 13,439 of the chapter 11 cases filed in 2009 were business filings. Id. at 291 tbl.F-2. Eighty districts reported increases in the number of chapter 11 filings. Id. at 22.

4. In 2009 alone, there were 40,225 business bankruptcy filings under chapter 7, nearly three times the

   number of chapter 11 business filings. Id. at 291 tbl.F-2.

5. For example, Borders Group Inc. initially filed for protection under chapter 11 with the intent to reorganize. See Joseph Checkler & Jeffrey A. Trachtenberg, Bookseller Borders Begins a New Chapter . . . 11, WALL ST. J., Feb. 17, 2011, at B1. However, such attempts ultimately failed, and Borders was forced to begin

   the liquidation process in July 2011. Mike Spector & Jeffrey A. Trachtenberg, Borders Forced to Liquidate, Close All Stores, WALL ST. J., July 19, 2011, at B1.

6. H.R. REP. NO. 95-595, at 220 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6179; see also Richard M.

   Cieri, Scott J. Davido & Heather Lennox, Applying an Ax When a Scalpel Will Do: The Role of Exclusivity in Chapter 11 Reform, 2 J. BANKR. L. & PRAC. 397, 401 (1993) (“The overriding purpose of [c]hapter 11 of the Bankruptcy Code is to provide a troubled business the chance to catch its financial breath, propose a plan to reorganize and to thereby allow it an opportunity to cure its financial ills and continue in business.” (footnotes omitted) (internal quotation marks omitted)).

7. See Melanie Cohen, Chicago Deep-Dish Pizza Chain Giordano’s Enters Bankruptcy, WALL ST. J.

   BANKR. BEAT (Feb. 17, 2011, 5:08 PM), http://blogs.wsj.com/bankruptcy/2011/02/17/chicago-deep-dish- pizza-chain-giordanos-enters-bankruptcy (“In court papers, Giordano’s said it has ‘an urgent and immediate need for cash to continue to operate.’”).

8. See, e.g., Retired Pilots Ass’n of US Airways, Inc. v. US Airways Grp., Inc. (In re US Airways Grp.,

Inc.), 369 F.3d 806, 809 (4th Cir. 2004) (allowing the corporate debtor to receive $1.24 billion upon emerging from chapter 11 because it met its financial projections).

9 See H.R. REP. NO. 95-595, at 220–22.

1. See Lindsey Freeman, Comment, BAPCPA and Bankruptcy Direct Appeals: The Impact of Procedural Uncertainty on Predictable Precedent, 159 U. PA. L. REV. 543, 546 (2010) (“[T]he problems direct appeals

   create highlight a tension inherent in bankruptcy law: the need to balance practical considerations such as speed, efficiency, and specialized review, with constitutional values, including fairness, due process, and the right to an appeal.”).

   To address the proper balance for these competing interests, appellate courts fashioned the doctrine of equitable mootness. This judicially crafted doctrine allows a court to avoid determining an appeal on its merits when doing so would inequitably burden the interests of third parties or interfere

   with the debtor’s chances of reorganization.11 Although the concept arose soon

   after the Code’s enactment in 1978,12 interest in equitable mootness has renewed during the recent economic crisis in the courtroom13 as well as in scholarship.14 However, one question that continues to divide circuits is the appropriate standard of review applied to a district court’s or bankruptcy appellate panel’s determination that an appealed claim is equitably moot.15

   
   

   The rather cursory treatment of this issue by most courts16 is at odds with the issue’s complexity and importance. A first-level appellate court’s legal and factual judgments in bankruptcy are generally reviewed without deference because it is not the first court to review the underlying case.17 However, the normal state of affairs is complicated by the fact that the first-level appellate

   
   

2. See, e.g., Alta. Energy Partners v. Blast Energy Servs., Inc. (In re Blast Energy Servs., Inc.), 593 F.3d 418, 424 (5th Cir. 2010) (“Equitable mootness authorizes an appellate court to decline review of an otherwise viable appeal of a [c]hapter 11 reorganization plan, but only when the reorganization has progressed too far for the requested relief practicably to be granted.”).

3. See Lenard Parkins et al., Equitable Mootness: Will Surgery Kill the Patient?, AM. BANKR. INST. J.,

   Sept. 2010, at 40, 40.

4. See, e.g., In re Blast Energy Servs., Inc., 593 F.3d at 424–26; B & M Inv., LLC. v. Calise (In re Calise), 354 F. App’x 510, 513 (2d Cir. 2009); Search Mkt. Direct, Inc. v. Jubber (In re Paige), 584 F.3d 1327, 1337–48 (10th Cir. 2009); Bank of N.Y. Trust Co., NA v. Official Unsecured Creditors’ Comm. (In re Pac. Lumber Co.), 584 F.3d 229, 240–43 (5th Cir. 2009); Wooley v. Faulkner (In re SI Restructuring, Inc.), 542 F.3d 131, 135–37 (5th Cir. 2008); Liquidity Solutions, Inc. v. Winn-Dixie Stores, Inc. (In re Winn-Dixie Store, Inc.), 286 F. App’x 619, 623–24 (11th Cir. 2008) (per curiam); Curreys of Neb., Inc. v. United Producers, Inc.

   (In re United Producers, Inc.), 526 F.3d 942, 947–51 (6th Cir. 2008).

5. See generally Ryan M. Murphy, Equitable Mootness Should Be Used as a Scalpel Rather than an Axe in Bankruptcy Appeals, 19 NORTON J. BANKR. L. & PRACT. 33 (2010); Parkins et al., supra note 12; Freeman, supra note 10; Katelyn Knight, Comment, Equitable Mootness in Bankruptcy Appeals, 49 SANTA CLARA L. REV. 253 (2009); Caroline L. Rosiek, Note, Making Equitable Mootness Equal: The Need for a Uniform Approach to Appeals in the Context of Bankruptcy Reorganization Plans, 57 SYRACUSE L. REV. 685 (2007).

6. Compare In re Paige, 584 F.3d at 1334–36 (reviewing equitable mootness for an abuse of discretion), with United States ex rel. FCC v. GWI PCS 1 Inc. (In re GWI PCS 1 Inc.), 230 F.3d 788, 799–800 (5th Cir. 2000) (reviewing equitable mootness de novo).

7. See, e.g., In re GWI PCS 1 Inc., 230 F.3d at 799–800 (addressing the issue in half a page).

8. See, e.g., In re Cont’l Airlines, 91 F.3d 553, 568 n.4 (3d Cir. 1996) (en banc) (Alito, J., dissenting) (“[T]here is an unbroken and well-established line of authority from this court holding that ‘[b]ecause the

   district court sits as an appellate court in bankruptcy cases, our review of the district court’s decision is plenary.’” (second alteration in original) (quoting Precision Steel Shearing, Inc. v. Fremont Fin. Corp. (In re Visual Indus...